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LENNAR CORP

Moderator: Grace Santaella June 20, 2017 11:00 am EST

Coordinator: Welcome to Lennar’s Second Quarter Earnings Conference Call. At this time

all participants are in a listen-only mode. After the presentation we will

conduct a question-and-answer session. Today’s conference is being

recorded. If you have any objections, you may disconnect at this time.

I will turn the call over to David Collins for the readings of the forward-

looking statements.

David Collins: Thank you and good morning, everyone. Today’s conference call may

include forward-looking statements including statements regarding Lennar’s

business, financial condition, results of operations, cash flows, strategies and

prospects. Forward-looking statements represent only Lennar’s estimates on

the date of this conference call and are not intended to give any assurance as

to actual future results. Because forward-looking statements relate to matters

that have not yet occurred, these statements are inherently subject to risks and

uncertainties.

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Many factors could affect future results and may cause Lennar’s actual

activities or results to differ materially from the activities and results

anticipated in forward-looking statements.

These factors include those described in this morning’s press release and our

SEC filings, including those under the caption risk factors contained in

Lennar’s annual report on Form 10-K most recently filed with the SEC.

Please note that Lennar assumes no obligation to update any forward-looking

statements.

Coordinator: I’d like to introduce your host, Mr. Stuart Miller, CEO. Sir, you may begin.

Stuart Miller: Great, thank you, David. This morning I’m with Rick Beckwitt, our

President; Bruce Gross, our Chief Financial Officer; Dianne Bessette, our

Vice President and Treasurer and of course, David Collins, who you just heard

from. And we also have Jeff Krasnoff, CEO of Rialto here and Eric Feder

from the Rialto Group; Jon Jaffe, our Chief Operating Officer; is also with us

by phone from California and will participate in the Q&A portion.

As always I’m going to start with a brief overview, Bruce will deliver further

detail and we’d like to ask that during the Q&A portion that you limit your

questions to one question and one follow-up so that we can accommodate as

many participants as possible in the hour allotted.

So let me go ahead and begin by saying that we’re very pleased to announce a

very strong earnings for the second quarter, with strong and balance results

being reported by each of our operating segments. While in our first quarter,

we noted that the somewhat sluggish overhang from the end of 2016 had

negatively impacted margins and therefore our operating results we felt that

the market was improving as sales picked up throughout the first quarter.

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We anticipated that the spring selling season would be solid and that we

would in fact see improved results as the year progress. These are exactly the

conditions that drove our results for the second quarter.

We’ve continued to see strength in the housing market through the second

quarter and have seen new orders, home deliveries and margins exceed our

initial expectations.

Generally speaking, in spite of the often noisy political environment, there

continues to be a general sense of optimism in the market, there continues to

be a perception that jobs are being created across the country and that wages

are generally moving positively.

We often discussed labor shortage in many sectors of the economy is

translating into a sense that many job sectors compensation is moving up.

And while much of the data collected by the government doesn’t seem to

reflect significant wage growth, the customers visiting our welcome home

centers are reflecting an optimistic sentiment.

There continues to be a general sentiment that the business environment is

positive and that the governmental pro-business environment will result in at

least job security and possibly some tax relief as well.

Overall, the attitude of our customers continues to confirm the sense that we

have as business operators that the economic environment in general is strong

and stable and improving. The slow and steady though sometimes erratic

market improvement that we have seen for the entirety of this recovery

continues to seem to be giving way to a more definitive reversion to normal.

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We continue to feel that limited supply and production deficits from the past

years are now intersecting with land and labor shortage and we started to see

some pricing power as we moved through the selling season somewhat offsets

however by construction costs increases.

Additionally, the economic realities of a constrained supply of housing

options and the economic realities of higher rental rates are beginning to have

a rational impact on decision making for the first time home buyer as

millennials are continuing to come to the housing market.

Across our platform, each of our business segments benefits from the overall

improvement in the market. As we look ahead through the remainder of 2017,

we are expecting that each of our business segments will continue to grow, to

mature and to improve as we enter the back half of the year.

Against that backdrop, let me briefly discuss each of our operating business

segments. To begin, our for sale core homebuilding operations continue to be

extremely well positioned for a very strong 2017. Deliveries for the first

quarter increased 15% and our gross and net margins improved 40 basis points

and 130 basis points sequentially.

In the second quarter, new orders were up approximately 12% year-over-year,

driven by a higher sales pace of four homes per community per month versus

3.9 last year, combined with a community count growth of some 6%.

Interestingly, our strongest markets Portland, Seattle, Inland Empire, Coastal

California, the Bay area, Tampa and Southeast Florida, all had a sales pace of

over five homes per community per month.

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We continue to gain stronger results powered by our focused strategy on

driving better quality traffic to our digital marketing efforts. Today, our social

media outreach generates internet leads that now surpass 100,000 per quarter.

And that is driving our marketing and advertising spend which is now down

year-over-year for 10 consecutive quarters. We continue to operate at a very

high level of efficiency and we’re continuing to focus on improving from

here.

Alongside our digital marketing effort, another example of one of our

technology initiatives is the implementation of our dynamic pricing tool. This

technology provides a dashboard for real-time matching of deliverable

inventory so that it can be priced and delivered more efficiently.

We saw the power and success of the dynamic pricing tool during this quarter

as we exceeded home delivery expectations by reducing our completed unsold

inventory by 17% without sacrificing margin.

As you’ve heard from us in prior quarters, we’re using various technology

initiatives to dramatically improve our operating model. Fueled by our digital

marketing efforts, our dynamic pricing tool and other technology initiatives as

well, we continue to focus on overall operational efficiency driving our

SG&A to historic lows for our first quarter and now for our second quarter as

well. We’re simply building a better mousetrap one technology at a time.

In addition, we closed on the WCI acquisition in the first quarter and the

integration which is being guided by Rick Beckwitt and his team led by Fred

Rothman and Darin McMurray is progressing exactly as planned. WCI will

continue to contribute to earnings as expected as purchase accounting and

non-recurring cost dissipate and as cost benefits and SG&A savings

accumulate.

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Overall, our core homebuilding strategy remains to pivot our land strategy

towards shorter term land acquisitions and to maintain a 7% to 10% growth

rate for the company while we enhance our operating platform by reducing

SG&A. Parenthetically, given the WCI addition, our 2017 growth rate should

be on the higher side or a little bit over our goal for the year.

Additionally, we are focused on expanding our first time homebuyer offering

with our mix now standing right at around 40%. Combined, these strategies -

these strategic elements will produce very strong cash flow for the company

and will result in continued balance sheet improvement.

Let me turn briefly to our Financial Services segment. As you’ve seen, our

Financial Services segment is continuing to perform well in the second quarter

as it contributed operating earnings of almost $44 million.

Of course, the business is growing in lockstep with our homebuilding

operations and with the addition of the WCI acquisition. As the refi business

has diminished over the past year, Lennar Financial Services is continuing to

expand its non-Lennar business reach and bottom line to replace those

earnings. Bruce, who oversees this operation will give additional color in just

a few minutes.

LMC, Lennar Multifamily Communities, our Multifamily Apartment segment

has continued to grow and exceed expectations. LMC generated $6.5 million

of earnings in the second quarter driven by the sale of one of our merchant

build apartment communities. While we have continued with the

development of our merchant build communities, we also have grown LMV

our build-to-core program, which is cash flow focused on building an

apartment portfolio.

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In the second quarter, we started 1,140 apartment homes in four communities

with the total development cost of approximately $520 million. As of May

31, we had a geographically diversified pipeline of 76 communities totaling

approximately 23,600 apartment homes with a total development cost of

approximately $8.2 billion.

These included 37 merchant build communities totaling approximately 12,000

apartments with a total development cost of $4.1 billion and 39 LMV build-

to-core communities totaling approximately 11,600 apartments with a total

development cost of approximately $4.1 billion. Our Multifamily platform

continues to grow and to perform beyond our projections and expectations.

Turning to Rialto, Rialto contributed $6.2 million to the bottom line this

quarter versus a loss a year ago. Rialto’s investment and asset management

platform has continued to grow its asset base as well as harvest value for

investors and for us.

Our first two flagship opportunity funds continue to be top quartile

performers. We’re also pleased that our third opportunistic fund held its final

closing with approximately $1.9 billion in total commitments and it has

already invested or has under contract 33 transactions involving the

investment of over $600 million of equity. And to complement our

opportunistic funds, we also have over $1.1 billion of investor equity

dedicated to investment grade CMBS, mezzanine and transitional lending

which we also will be looking to grow this year.

On the Rialto Mortgage Finance side of the business, market conditions have

continued to be favorable for RMF which has maintained its position as one of

the largest and most profitable non-bank CMBS originators. RMF completed

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its 39th and 40th securitization transactions during this quarter with net

margins averaging 5.8% selling over $392 million of RMF originated loans.

Our direct investments should be winding down over the next quarters as the

remaining assets are monetized and cash is recycled into our higher returning

businesses. Going forward from that point, our focus will be solely on our

investment management and RMF business segments there.

Finally, FivePoint successfully completed its IPO this quarter and now enters

the public markets as a pure play California master plan community

developer. We expect that over time the value embedded in the FivePoint

management team and its extraordinary asset base will be realized as the

appreciation cycle of these extremely well located communities will be

revealed through transparency and public filings. Certainly from a Lennar

perspective the new stock symbol FPH will afford Lennar shareholders greater

transparency to this part of our balance sheet.

Finally in conclusion, across the platform, our company is very pleased with

the accomplishments of our second quarter and we’re feeling very optimistic

about the remainder of the year. We are clearly well positioned to capitalize

across the platform on the strong market conditions that have materialized and

seem to define the market in the near future.

Each of our operating segments is mature and positioned to perform and

strengthening market conditions. People, assets and operations are all aligned

to perform in 2017 and we look forward to keeping you updated.

So with that let me turn over for greater detail to Bruce.

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Bruce Gross: Thanks, Stuart and good morning. Our net earnings for the second quarter

were $213.6 million or $0.91 per diluted share and this compares to second

quarter 2016 net earnings of $218.5 million or $0.95 per diluted share which

included a favorable $0.02 per diluted share impact due to a lower 32.2% tax

rate as a result of energy credits available in the prior year.

Revenues from home sales increased 18% in the second quarter, driven by a

15% increase in wholly-owned deliveries and a 3% increase in average selling

price to $374,000. As Stuart highlighted, our homebuilding team used our

new technologies and a strong sales season to focus on selling deliverable

inventory. This resulted in a significant increase in our expected backlog

conversion ratio to 86% for the quarter.

Additionally, our completed unsold home inventory dropped by 224 homes or

17% sequentially from the first quarter. This focus on deliverable inventory

resulted in an acceleration of home deliveries that were previously expected in

our third quarter.

WCI contributed 388 deliveries to the quarter and that was about 70 more than

were expected. Our gross margin on home sales in the second quarter was

21.5%. We are on track with our previously stated goal of 22% to 22.5%

gross margins for the full year. The prior year’s gross margin was 23.1% and

the decline year-over-year was due primarily to increased land and

construction costs. Our gross margin percentage was impacted 20 basis points

due to write up of WCI backlog inventory that closed during the quarter.

Sales incentives year-over-year were consistent at 5.7%, but improved

sequentially by 20 basis points from our first quarter. Gross margin

percentages were once again highest in our homebuilding east segment.

Direct construction costs were up 5% year-over-year to approximately $55 per

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square foot, driven by an approximate 7% increase in labor and 4% in material

costs driven primarily by lumber.

Our SG&A percent in the second quarter was consistent with the prior year at

9.3% which was a record low. We are continuing to improve SG&A

operating leverage by growing volume organically in existing homebuilding

divisions and benefiting from our focus on our technology investments

through the company. Included in our SG&A for the second quarter were

transaction related expenses to the WCI acquisition which had a 20 basis point

impact.

Other income net was $3.8 million compared to $13.7 million in the prior

year. In the prior year, we did have a profit participation from one of our

homebuilding consolidated joint ventures that drove most of that profit.

Equity and loss from unconsolidated entities was $21.5 million which

included our share of net operating losses from JVs as they incur general and

administrative expenses while ramping up for future land sales. We opened

86 new communities during the quarter and closed 102 communities to end

the quarter with 736 net active communities.

We continued with our soft pivot strategy as we purchased only 7,500 home

sites totaling $371 million in the second quarter and our home site count

owned and controlled now totals 167,000, of which 136,000 are owned and

31,000 are controlled.

Our Financial Services business had strong results with operating earnings of

$43.7 million compared to $44.1 million in the prior year. Mortgage pre-tax

income decreased slightly to $32 million from $36.8 million in the prior year,

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mortgage originations were $2.3 billion compared to $2.4 billion in the prior

year.

Refinance volume was down 48% compared to the prior year, leading to a

more competitive origination environment. The capture rate of Lennar home

buyers was 80% compared to 83% in the prior year.

Our title companies profit increased to $9.7 million during the quarter from

$7.4 million in the prior year, driven by an 8% increase in revenue and

operating leverage from these higher revenues. And then our new Florida

realty brokerage operation acquired from WCI generated $2.2 million of profit

during the quarter. The spring selling season quarter is typically the strongest

quarter of the year for this business.

More detail on Rialto, this segment produced $6.2 million compared to last

year’s loss of $13.8 million, both years are net of non-controlling interest.

The investment management business contributed $42 million of net earnings

which included $5.8 million of equity and earnings from the real estate funds

and $36.3 million of management fees and other which includes $11 million

of carried interest distributions.

At quarter end, the undistributed hypothetical carried interest for Rialto Real

Estate Funds 1 and 2 now totals $119 million. Rialto Mortgage Finance

operations contributed $392 million of commercial loans into two

securitizations resulting in earnings of $15.6 million compared with $386

million and $12.7 million in the prior year respectively.

The increase in earnings was primarily due to an increase in the average net

margins and the securitizations from 3.6% in the prior year to 4.2% in the

current year. Our direct investments had a loss of $13 million as we continue

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to focus on monetizing the remaining assets from the early portfolio

purchases.

Rialto G&A and other expenses were $32.1 million for the quarter and interest

expense was $6.3 million. Rialto ended the quarter with a strong liquidity

position with $120 million of cash.

The Multifamily segment delivered a $6.5 million operating profit during the

quarter primarily driven by the segments $11.4 million share of gains from the

one operating property that was sold, as well as management fee income

partially offset by G&A expenses.

Our tax rate for the quarter was 33.8% which included a favorable resolution

with the IRS. The rate is higher than the prior year’s rate of 32.2% due to the

energy credits in the prior year. And we expect the tax rate to be

approximately 34% for the remainder of this year.

Turning to the balance sheet, our balance sheet remained strong with the net

debt-to-total capital of 40.7%, a decline of 280 basis points over the prior

year. Our liquidity strength provides exceptional financial flexibility with

$748 million of cash and no outstanding borrowings on our revolving credit

facility. This facility was amended during the quarter to extend out to five

years and to increase the commitments to $2 billion which includes a $400

million accordion feature.

During the quarter, we retired our 12.25% senior note maturity of $400

million which was due June 1, with the proceeds from our new issuance of

$650 million of 4.5% seven year senior notes. This results in an annual net

cash interest savings of $31 million per year. We intend to use the balance of

the proceeds to redeem the 6.875% senior notes that were acquired with the

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WCI transaction. This redemption will likely occur at the next call date in

August. Stockholders equity increased to $7.3 billion and our book value per

share reached $31.23 per share.

Now I would like to update our goals for 2017. We are right on track to

deliver between 29,500 and 30,000 homes for 2017. Given that we

accelerated closings from Q3 into Q2, there is a smaller population of homes

available for delivery in Q3 and therefore we expect the backlog conversion

ratio to be similar to 2016 second half conversion ratios, which was 75% for

the third quarter and close to 90% for the fourth quarter.

We are increasing our average sales price guidance to between $370,000 and

$375,000 for the year. We are still on track to hit our expected operating

margins of around 13% for the full year. The full year gross margin is still

expected to be in a range of 22% to 22.5%. We expect our third quarter gross

margin percentage to between 21.75% and 22%.

We still expect continuing improvement in the SG&A line to be between

9.1% and 9.3% for the full year. The third quarter will have some non-

recurring transition cost relating to the WCI transaction and therefore we

expect SG&A to be approximately 9.3% again in the third quarter. The fourth

quarter however should realize the largest leverage given our higher expected

volume for the fourth quarter.

Financial Services despite a large decline in refis, we are on track with our

financial services goal of $160 million for the year with the third quarter

expected to be $45 million to $50 million.

Turning to Rialto, Rialto is now expected to generate profits of approximately

$30 million for the year with the third quarter expected to be in a range of $3

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million to $5 million. Multifamily is still on track to be between $70 million

and $80 million for the full year, the third quarter is expected to be

approximately $5 million of that number.

And joint ventures, land sales and other income, as we look at this combined

category, we still expect to range at $70 million to $80 million of profit for the

full year, the third quarter is expected to be profitable in the range of $0

million to $5 million and the fourth quarter will generate the bulk of the

profits in this category.

Corporate G&A is on track to still be 2.2% to 2.3% of total company revenues

for the year and our community count is still expected to be approximately

770 to 780 communities. The balance sheet is well positioned to end the year

with strong liquidity and similar leverage as 2016. So as you can see, we are

well positioned to achieve our goals for the remainder of 2017.

So with that, let me turn it back to the operator to open it up for questions.

Coordinator: Thank you. We will now begin the question-and-answer session. If you

would like to ask a question, please press star followed by the 1 on your

phone. Unmute your phone and record your name clearly when prompted.

Your name is required to introduce your question. To cancel your request,

press star followed by the 2. One moment for our incoming questions.

Our first question comes from Ivy Zelman. Your line is now open.

Ivy Zelman: Thank you, good morning guys, congratulations, another solid quarter. Stuart,

you mentioned in your opening comments that roughly 40% of the business

was really geared at the entry level segment and just talking about what’s

happening from a pricing perspective, there has been an acceleration in

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pricing really throughout the year from January to through the spring selling

season given the strength. Is there a level of price appreciation that can

concerns you as affordability is still attractive?

I mean how much runway do you think you have and you mentioned your

technology on pricing, maybe you can give us some flavor around an apples-

to-apples comparison what you’re seeing in the start of market as I hear lot of

questions about concerns about the rapid rising appreciation and concerns that

it may look like ‘13 when the market got too egregious and pricing was

getting a little ahead of its skis. So if you can comment there and then I have

a follow-up. Thanks again.

Stuart Miller: Sure, look I think that - I think its clear pricing has been moving up and even

the line between first time and move up buyer is starting to get a little blurry

and has been moving up over the past couple of years.

I think that I’m going to turn over to Rick and Jon to give some color from the

field. I think generally speaking we are seeing that people - though the

pricing is moving up people are finding that the affordability from

employment wage growth and general economic factors is increasing as well

and enabling people to come to the market. Rick?

Rick Beckwitt: Yes, Ivy. So if you look at the quarter, our sales prices were up about 5% on

overall aggregate basis and granted some of that, you know, impacted by mix.

But as you look at the entry level product that we’re dealing in our major

markets, we’re able to offset the efficiencies of production associated with the

price increases in those communities. So we’re having a pretty well balanced

program right now and really on track with the underwriting that we’ve had.

Stuart Miller: Jon, you want to weigh in on that?

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Jon Jaffe: Yes. I would just echo that the consumer sentiment is really a driving factor

right now and we’re not seeing spikes in appreciation that are causing

concerns and we’re really not seeing that at the mortgage table. So I think its

typical housing follows jobs and wages and that’s really a tailwind that we

have right now.

Ivy Zelman: Great. And my follow-up Stuart, the question for Stuart as it relates to sort of

capacity knowing that the U.S. housing market is still significant deficit

what’s needed shelter for single family and retail is extremely tight and very

constraint with days on market falling below 30 days according to NAR.

One question comes up a lot in meetings as you’ll hear from clients is, okay,

now all the builders, you know, you’re the prettiest girl at the dance if you’re

building, you know, within the FHA loan limit and there is not enough supply,

but everybody is going there. You know, from your perspective, is there a

room and depth for now the industry all rushing to go to the B and even C

rings of the market and give us some comfort that they’re not going to get a

crowding situation or saturation.

Stuart Miller: You know, I think there are some governors out there Ivy and we’ve

mentioned this in past conference calls. I think there is a limitation on land

availability, land pricing that yields to affordable housing. I think there are

labor shortages generally. I think that while demand is continuing to grow, I

think there are some limiters on how quickly the production can keep up and

can expand to meet that demand.

The question is to whether there is going to be a flood to the B and C

locations, you know, there is certainly more demand for those locations as the

market expands. As we’ve highlighted before, it’s our strategies to stay inside

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those outskirts. And so we think that our strategy is really well crafted for

where the market is going and we certainly don’t want to get way out on the

outer fringes. Rick, you want to add to that?

Rick Beckwitt: Yes, and it’s all about the overall land strategy. You know, we try to stay

ahead of where the market is going. I’d like the think that we’re one or two

steps ahead of where the industry is. And as a result, we’ve tied up as we’ve

talked about in the past, a lot of contiguous land through option contracts that

put us in a good position as the market evolves.

Ivy Zelman: Okay, great. Good luck guys. Thank you very much for taking my questions.

Stuart Miller: Sure.

Coordinator: Our next question comes from Robert Wetenhall from RBC Capital Markets.

Your line is open.

Robert Wetenhall: Hey, good morning. Tremendous quarter. Wanted to ask Stuart and Rick and

Jon, how much operating leverage is left in the model? You called out

dynamic pricing, you’re obviously having great success leveraging the SG&A

side of the business with some of the new social marketing initiatives you’re

undertaking.

What’s left? Because you guys made great strides in the short amount of

time, it seems like all levers are working in the business. Can you get a better

net margin in say the next 18 months or two years due to the fact that you got

favorable operating leverage, the pricing environment seems benign if not

outright positive and you’re doing a great job of leveraging the cost structure.

What’s left to extract from the business in terms of net margin in the current

environment?

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Stuart Miller: So Bob, I would turn the sentiment around and say that we feel that we’re at

the very beginning stages. We are articulating our successes relative to digital

marketing and now dynamic pricing because we can point to some tangible

effects that people can latch on to. But this is a big strategic initiative within

the company. We feel that we’re at the very early stages, very early innings

of what I said in my comments building a better mousetrap.

We think that there is a lot more leverage. I think it derives from a lot of

smaller initiatives adding up overtime. And as they become more provable,

we’ll start to put them on the table. I don’t want to start getting out over my

skies or creating false optimism it has been done before. But as we prove

these up, we’re talking about them a little bit more.

I think that many know, many people know that this is a very big strategic

focus for the company. And we think that we can produce a lot of operating

leverage and bring our operating margins up. I don’t want to quantify it, but

we don’t think it’s tens of basis points, we think it’s much bigger than that and

it will be overtime.

Robert Wetenhall: That’s good to know, thank you. And for a follow-up question, you guys had

the successful IPO of FivePoint earlier this year and it seems like some of the

ancillary businesses are maturing nicely. And I wanted to ask you Stuart,

what’s your vision of the business in say the end of 2018 or 2019? You’ve

called out a reversion to pure play as a homebuilder, back to basics. And it

seems like the other ancillary businesses are maturing nicely. How do we

think about the trajectory of how this plays out in say the next 18 to 24

months, what are your expectations? Thanks and good luck.

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Stuart Miller: Thank you. So we’ve highlighted in past conference calls that we’re very

focused on reverting to pure play to the pure play homebuilding model. Of

course, we’ve talked about the IPO of FivePoint, we think that brings great

transparency and visibility. But we’re working every day on some of the

other components of our business.

You’ve heard us talk a lot about LMC, our multifamily apartment rental

program, that program as we move through our merchant build assets and

migrate towards our build-to-core strategy, this sets up an opportunity for us

to maintain this strategy within the company if it strategically make sense as a

core asset or to do some kind of alternative transaction and that can very well

happen over the next couple of years.

On the Rialto side, you’ve seen the buildup of our investment management

business, you seen the buildup and execution around Rialto Mortgage Finance

and you are seeing a very focused strategy on liquidating our core holdings,

our assets that where we invested Rialto capital. So that we’re going to

reduce that business to just those two core business lines of RMF and

investment management.

And as we do that, we come to the end of 2017, the next few quarters we’re

really going to have something that will be able to be either combined, IPO, or

spun out and we look forward to doing that over the next couple of years as

well. So we think as we look forward expect to see a refined pure play

homebuilder over the next couple of years.

Robert Wetenhall: Got it. Thanks and good luck.

Stuart Miller: Thanks.

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Coordinator: Our next question comes from Mike Dahl from Barclays. Your line is open.

Anthony Trainor: Hi, this is Anthony Trainor filling in for Mike. Thanks for taking my question

and congrats on a strong quarter. So, just wanted to talk a little bit about this

gross margin ramp in the second half. Is there any way you can provide kind

of the puts and takes around what’s driving the step up from 2Q to 3Q and

then kind of how you guys get from 3Q or 4Q in order to maintain this full

year guide? Any type of - anything you can help us in terms of the bridge

there will be great.

Rick Beckwitt: Probably the biggest impact on the margin is the amount of field expenses that

are absorbed given the increased volume closings. That combined with the

fact that generally we enter the year with a little bit lower sales pace and we’re

able to push pricing throughout the year. It’s a very typical seasonal pattern.

Anthony Trainor: Great. And then I guess there as a follow-up. You mentioned that the East

has the highest gross margin percentage. Do you have what the Central gross

margin percentage is relative to the full company? Because given that

backlog value in the Central region is now down year-on-year that should be a

smaller portion of revenues in the second half.

Bruce Gross: We haven’t broken that out by region, but that’s something on a follow-up I

could certainly talk through with you.

Anthony Trainor: Great, thank you.

Coordinator: Our next question comes from Buck Horne from Raymond James. Your line

is open.

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Buck Horne: Hey, thank you, good morning. I wanted to ask a strategic question of sorts,

it’s pretty well known. A competitor has made a pretty intriguing strong

different external land development platform and I’m kind of curious how you

see the market over the next couple of years for land development and

finished lots evolving. And would it make some sense for Lennar to develop

its own external platform or partnership for finished lots, you know,

notwithstanding, you know, the relationship with FivePoint in California?

Rick Beckwitt: So, I think you’re talking about the Forestar news that’s out there. As those of

you that don’t know Starwood Capital has that as a merger agreement to

acquire that company. Another builder has recently announced that they have

an interest in trying to put something together that buys the majority of the

company and run it as a land bank type of machine that would feed that

company.

You know, it’s an interesting set of cards, we really don’t want to comment

on, you know, the viability of that platform or the stub piece that would trade

in the market. But as we look at, we have had absolutely no problem sourcing

land. We do a lot of partnerships and have a tremendous depth of

connectivity with the land sellers and land developers out there. And we think

that, you know, we’re going to continue down our path and continue to grow

the company.

Buck Horne: That’s perfect. Now that’s exactly what I was trying to ask about, so I

appreciate you reading through those lines. And last, I’d like to just go back

to WCI just for a second. You know, how do you see the integration I guess

progressing from here in terms of, you know, growth plans or acceleration of

community activity and maybe if you can add some color about what you’d

like to do with the WCI tower pads going forward as well?

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Rick Beckwitt: Well on the integration front, as Stuart said, we’re exactly where we planned

again if not a little bit ahead of schedule. The only integration that’s left is

really some backend IT stuff, the fine tuning on integrating the accounting and

control assumptions. Although from an operating standpoint we are one

company right now. We’re continuing with the WCI brand, because we think

that there is an increased ASP growth on those communities.

From a targeted standpoint with regard to the pads, we have one of the towers

under construction right now that’s doing really well once we entered the sales

season. And our plan is to - if the market is there to continue to build and

develop out that business. WCI is a power house in that, in those markets and

with our expertise especially on our multifamily side since we do a lot of high

rise in the multifamily business. Now we’re able to arbitrage costs as that will

make that business even stronger.

Stuart Miller: You know, let me just add to that and say, you know, WCI really is a

textbook, you know, merger, combinations, integration story. It’s happened

very quickly, very efficiently. We are as Rick says up, we are one company at

this point. The positive side of that is that we have clean and clear operating

strategies going forward. And the two pronged programs that lead to the best

operating results and that is the ability to apply our construction cost, you

know, preferred customer approach to dealing with subcontractors is really

going to benefit the WCI business going forward.

And the SG&A leverage that we have been improving on the Lennar platform,

we think better than others is going to help leverage the additional volume that

we see from WCI in the future. Getting the integration behind us quickly and

efficiently really enables us to take advantage of those two strategic

advantages and we think we’re going to see that going forward.

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Buck Horne: That’s great, thank you very much for the comments.

Stuart Miller: You bet.

Coordinator: Our next question comes from Stephen East from Wells Fargo. Your line is

open.

Stephen East: Thank you and good morning everybody. Bruce, you talked about, you

expected strong cash flow this year, could you give us an idea of what type of

magnitude you’re talking about this year and next year and as you all rank

order, you know, your options for that - usage of that cash?

Bruce Gross: So let me start, we haven’t given next year’s numbers out yet although we’ll

expect next year to be strong as well. But for this year, we talked about

approximately $0.5 billion of operating cash flow. And one of the things we

said at the beginning of the year is we were comfortable paying all cash for

WCI and that was a $643 million acquisition. So, you know, that was one of

the primary uses of the operating cash flow for this year.

We expect the leverage by the end of the year to be similar to the prior year,

so that will put us in really good shape as we enter ‘18 and we’ll give that

updated guidance in our fourth quarter.

Stephen East: Okay, fair enough.

Stuart Miller: But make no mistakes Steve, we are very focused on cash flow generation and

focused on really improving the balance sheet as we go forward.

Stephen East: Okay. And along those lines Stuart, I guess I’ll ask a different version of

Buck’s question. When you look at FivePoint, do you see a vehicle that, you

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know, in this cycle could expand away from California and into other parts of

the country and maybe act as a partner with you to maybe continue or

accelerate your soft pivot somewhat?

Stuart Miller: Yes, that’s - you know, first of all I - FivePoint today is a strong independent

company with a strong Chief Executive Officer, Emile Haddad and I certainly

don’t want to take away from his articulation of strategy. But having been on

the road show with him now for a few weeks, I do feel that I can comfortably

say that FivePoint’s strategy is to remain focused as a California pure play

master plan community focused developer. It has a strong complement of

assets that it is focused on today and it’s not going to be distracted by a land

strategy for Lennar or any other builder across the country. It’s going to stick

to its core competence.

We endorse that strategy for FivePoint, we think that’s how they’re going to

drive bottom line and execute their strategy in the public markets as they’ve

articulated it. So they are - you know, for those who might think about the

Forestar strategy and applying that to a FivePoint, that’s just simply not our

thinking about strategy nor is it the articulated strategy of FivePoint.

Stephen East: Fair enough, that’s extremely helpful. You know, if I could sneak one other

in, you all have talked in the past reducing floor plans, your labor hours with

technology, you know, becoming more of a manufacturing process, et cetera.

Do you see with the labor issues continuing and probably continuing for good

chunk of this cycle? Do you see a fundamental change in the way you build

i.e., more panelization, modular or whatever the case maybe?

Stuart Miller: You know, Jon leads that - a lot of that effort and has done extraordinary work

there. Jon, why don’t you take that?

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Jon Jaffe: Sure. You know, really, we explore those options every day. We have a

supply chain team that’s very focused from the beginning of the process

through the end. There really hasn’t been a realization in the area of modular

or prefabing, but yes, we continue to explore that.

The opportunities that we’re seeing are really eliminating the waste that’s in

the supply chain by forming very close relationships with the suppliers and

manufacturers and recalibrating that to drive some efficiencies and that’s what

we see over the near to medium term and perhaps longer term there will be

some technologies that enable some change. But, you know, remember, our

factory is out in the field, its home site by home site. So it doesn’t lend itself

the same way that some other manufacturing processes do to the advance of

technologies.

Stuart Miller: Well, within our environment we’ve really engineered and Jon has spear

headed using our every things included marketing strategy as a mechanism for

creating Lennar as a builder of choice among subcontractors. And we’ve built

a lot of partnership to be able to strategize in how we can breed efficiencies

into our building process and our cost structure. And I think we’ve made

some meaningful inroads along those lines.

Stephen East: Okay, thanks a lot. I appreciate that Stuart.

Stuart Miller: You bet.

Coordinator: Our next question comes from Jack Micenko from SIG. Your line is open.

Jack Micenko: Hi, thanks for taking the question. You know, with the FivePoint’s

ownership, obviously you bought into some more on the deal. It might be a

technical question, but I think it has ramifications to the bigger Lennar story

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that kind of is a sum of the parts story. You know, you didn’t step up the

value of FivePoints on your balance sheet, I know it’s a long-term position.

How do we think about, you know, how you realize that value now it’s a

public traded entity longer term, you know, the value of that position?

Stuart Miller: Well, look, number one, I think that transparency associated with FivePoint

being a public company really helps our shareholder base understand its

horsepower. Now that story is going to evolve over the next quarters and

years as residential land is sold, as infrastructure improvements add to value,

as the cycle of appreciation embedded in master plan communities really

reveals itself through quarterly conference calls and accomplishments, our

shareholders are going to be able to see FivePoint’s improvement through the

transparency and articulations through the public markets.

You know, I think that FivePoint’s strategy as it’s been articulated is very

focused. There is excellent management team in place. We’re happy to

number one, be invested in the assets that are - that make up FivePoint,

invested in the management team that makes up FivePoint and we think that

given California’s land constraint, we’re going to have - we’re going to see a

tremendous appreciation overtime.

Bruce Gross: And let me just add the technical part of that question, the difference between

the basis on our books and FivePoint books is recognized when there is a

third-party sale from FivePoint that difference will be recognized by Lennar.

Jack Micenko: Okay, thank you, that’s helpful. And then looking at the backlog, the ASP is

up about 6% year-over-year, looks like some acceleration there. Is that the

pricing power you are speaking off or is that WCI mix or maybe a little bit of

both?

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Bruce Gross: It’s a little bit of both. You know, we are seeing some mix, but we are seeing

some price appreciation. The 3% this quarter gave us the confidence as we

looked at our backlog to increase the average sales price for the rest of the

year. So it’s a little of both.

Jack Micenko: Alright, thank you.

Coordinator: Our next question comes from Michael Rehaut from JP Morgan. Your line is

open.

Michael Rehaut: Thanks, good morning everyone.

Stuart Miller: Good morning.

Michael Rehaut: First question, you know, just about sales pace throughout the quarter. You

know, if you kind of take the average community count and I know this is

kind of an in exact science, but, you know, just using a methodology

consistently, you know, we have sales pace up roughly 3% year-over-year that

compares to up 5% last quarter.

Just curious if, you know, you see anything different in terms of how, you

know, at least on a year-over-year bases, was that kind of, you know, modest

improvement, you know, kind of consistent throughout the quarter? You

know, again a percent here or there is not too material, but was there any

change as you saw it versus the first quarter? As, you know, we kind of focus

on the pace year-over-year, it’s kind of getting a better picture of year-over-

year demand - change in demand.

Stuart Miller: Jon, want to give prospective there?

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Jon Jaffe: Yes. I think you saw the traditional spring selling season that strength as you

look at year-over-year and the slight uptick in comparison just to show that

this year was a little bit stronger reflective of our earlier comments seeing in

consumer confidence, wage and job growth all reflecting an increased traffic

at our welcome home centers, increased conversion rate of that traffic. So all

building to a slightly stronger sales pace.

Michael Rehaut: And nothing different that you saw during the quarter?

Jon Jaffe: Pretty consistent. The quarter strengthened from the first month to the second

two months, but pretty consistent over the quarter.

Michael Rehaut: Great. And then just secondly on the ASP, you know, I think you kind of

talked about 2Q, the improvement being a little bit mix and pricing driven and

that’s what drove your confidence to increase the guidance for the full year.

Just want to clarify that, you know, that increase in, you know, about $5,000

per home, is that also kind of in some ways both mix and pricing driven? And

is it right to assume that, you know, you’re not necessarily increasing your

gross margin guidance because you may perhaps that’s being offset to the

extent that there is a little bit of pricing there, it’s being offset by continued

inflation or how should we think about that?

Stuart Miller: You know, there is always a question around mix versus price appreciation

when you’re rolling up numbers from across the country and it’s very hard to

disentangle. I think that there is some offset, you know, with construction

cost and labor cost and everything else. It’s really hard to get these, you

know, margin numbers and everything perfectly refined as we look ahead and

it moves around through the quarter.

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So, you know, it is as you said in your prior question Mike, it’s an in exact

science and I think we’re all kind of trying to look ahead to what the trend

looks like. Generally speaking we’ve seen some initial pricing power, some

initial, you know, sense of pricing power. But remember that you also have

the offset of construction costs and labor costs that are moving in tandem. So

we’ll see how the quarter unfolds, we’ve given the best guidance that we can

at this point.

Michael Rehaut: Great, thanks so much.

Stuart Miller: You bet. And I think we have time for one more question.

Coordinator: Our next question comes from Stephen Kim from Evercore ISI. Your line is

open.

Stephen Kim: Thanks very much for squeezing me in guys. I wanted to follow-up on that, I

think earlier in the call when you were addressing pricing, you were talking

about the entry level of the market and I thought that maybe it was Rick was

saying that you were able to offset cost with price there sort of suggesting that

margins, you know, were stable to maybe slightly positive trending.

In this context of a mortgage rate environment that’s kind of surprised us over

the last six months in terms of coming down fairly meaningfully. I’m

assuming that probably wasn’t baked into your guidance as well. Are you a

little surprised that you haven’t been able to recognize more pricing power at

the entry level particularly?

Rick Beckwitt: Well Steve, that’s not exactly what I said. What I was trying to say and let me

just backup. We have always articulated that the entry level is a lower margin

business given that it’s that type of business. We are continuing to see pricing

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power in that first time segment, what I was really trying to get to is given the

fact that it’s an easier simpler product to build with less foo foo in it if you

will, it helps us from a margin standpoint.

Stuart Miller: We don’t use foo foo on our conference call.

Rick Beckwitt: Well, less specialness on the outside let’s say.

Stephen Kim: Right.

Rick Beckwitt: Just easier to build, faster from the production standpoint.

Stephen Kim: Okay.

Stuart Miller: Next question, Steve.

Stephen Kim: Okay, got it. But within that, could you address the interplay of mortgage

rates and the obvious impact on affordability and how that affects your pricing

dynamic then at that segment of the market?

Rick Beckwitt: So, I think you are starting to see the buyers in that segment come to the table

a little bit better organized where they have their financing documents in a

row, they’ve got a little bit higher qualified buyer universe out there. And

that’s helping offset some of the price increase that we’re able to do, because

they’ve got - you know, they’re just better organized and positioned.

Stuart Miller: You know, let me add to that and say that, you know, I think Jon highlighted

earlier that a lot of what’s driving people to the market is a sense of

confidence. It’s animal spirits. It’s, you know, the notion that all of this is an

inexact science, you know, interest rates and affordability and wages and

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pricing, all play a part in, you know, what people can afford and how the math

actually works out.

But the confidence that people bring with them to the table about whether

their job is stable and whether there is going to be a wage increase or whether

there is opportunity for them to move and be mobile to the next job

opportunity, whether they have been to able accumulate a down payment or in

excess of a down payment or whether their family members that are able to

help support with a gift or something else. All of these are moving parts that

define this inexact science that we are all trying to kind of divine going

forward.

So, you know, it’s kind of hard to wrap all of our heads around where the

market is going, but the general trajectory is positive and even at the first time

buyer level as the millennials start to unwind their doubling up and come to

the market realizing that rental rates have gone up and there is a real reason to

go ahead and purchase. That first time buyer segment is showing some

optimism and some ability to be flexible in and around the affordability levels

and as prices move up. I don’t know if that’s helpful or not Steve, but…

Stephen Kim: Great. That’s - yes, that was just what I was getting at. So that’s very helpful.

Stuart Miller: All right.

Stephen Kim: The second question I had related to technology and I know you’ve done a lot

of work there and it’s come up a few times on this call and it’s an area of great

interest for us. I think that you had mentioned - you called out two areas in

particular, I think digital marketing and dynamic pricing and you said there

were some others. But within the digital marketing, I think you pointed that

marketing spend is down year-over-year for 10 straight quarters and in

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dynamic pricing that you reduced your standing inventory 17% without a

negative margin impact.

And I guess I was curious as to when you take those two, digital marketing

and dynamic pricing, are those the metrics that you’re primarily monitoring?

Is that you think are the most important for assessing the effectiveness of your

programs there? Or is there - are there other very important metrics that we

should be thinking about as it relates to those two? And when you mentioned

other initiatives outside of those two, are there any general areas that hold the

most promise that you think that we could be focused on?

Stuart Miller: Well, first of all let me say I’m so happy to hear that people are listening to

my opening remarks and you did recite back to me as you’ve clearly listened.

Look, these initiatives are really core to what we’re working on day-to-day

inside the company. And your question is a good one. The answer is that

those metrics are the starting metrics for those two initiatives, but they are not

the only metrics for those two initiatives. There are other embedded metrics

that we’re working at.

So, relative to digital marketing, the very first thing was proving that we could

improve our traffic, particularly the quality of traffic. Put aside the quantity

for a minute, but the quality of traffic while reducing the spend. So it was

really can we cut the spend by 50 basis points while we improve the quality of

the traffic and continue to grow our business. And that was the beginning

metric.

But as we become more proficient at digital marketing and as we can expand

the flow of qualified traffic, I highlighted 100,000 customers, qualified

customers coming to the doors driven by social media and internet marketing.

You know, as we can expand the number coming through the doors, we’re

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probably going to be able to see greater pricing power and other efficiencies

as well.

And I’m not going to go through and start articulating those metrics, but we

think there is more firepower in the digital marketing strategy and we are very

focused on that on a regular basis.

Likewise with the dynamic pricing tool, what you’re seeing in a reduction in

standing inventory is a starter. But the ability to sell homes that are not

standing inventory at the end of quarters helps alleviate the need to use

discounting mechanisms or incentives to move that inventory.

And so as we move forward with those digital tools or technology tools, we

think that there is more firepower in them. But we have a whole host of

initiatives of that we’re working on that we don’t articulate, because we’re

simply not getting out over our skis, but we are telling you that we’re working

on these things every day and we are committed and think we will build a

better mousetrap.

Stephen Kim: That’s great. Thanks very much for that. I appreciate it and good luck.

Stuart Miller: Okay, you bet. Thanks Steve. And I do want to say thank you everybody for

joining us. We look forward to keeping you updated as we move through the

rest of 2017. Thank you.

Coordinator: That concludes today’s conference. Thank you for your participation. You

may now disconnect.

END